The Role Of Stock Exchange Market To The Economic Growth In Tanzania: A .
THE ROLE OF STOCK EXCHANGE MARKET TO THE ECONOMICGROWTH IN TANZANIA: A CASE OF DAR ES SALAAM STOCKEXCHANGE MARKETKATUMA BIYANA DISSERTATION SUBMITTED IN PARTIAL FULFILMENT OFREQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER OFBUSINESS ADMINISTRATION OF THE OPEN UNIVERISTY OFTANZANIA2012
iiCERTIFICATIONThe undersigned certifies that he has read and hereby recommend for acceptance bythe Open University in Tanzania a dissertation entitled. “The Role of StockExchange to the Economic Growth in Tanzania”. A Case of Dar es Salaam StockExchange, in Partial Fulfillment of the Requirement for the Degree of Masters ofBusiness Administration (Finance) of the Open University of Tanzania. .Dr. W. A. Pallangyo(Supervisor) .Date
iiiCOPYRIGHTThis dissertation is copyright material protected under the Berne convention, thecopyright Act 1999 and other international and national enactments, in that behalf,on intellectual property. It may not be produced by any means, in full or part exceptfor short extracts in fair dealing, for research or private study, critical scholarlyreview or discourse with an acknowledgement, without written permission of theDirectorate of Postgraduate Studies, on behalf of both the author and the OpenUniversity of Tanzania.
ivDECLARATIONI, Katuma Biyan, hereby declare that this dissertation is my own account of researchand contains, as its main content work which has not previously been submitted for adegree at any higher learning institution. .Signature .Date
vDEDICATIONI dedicate this work to my late parents mummy Damari Biyan, and Doddy BiyanWandwi and my daughter Juliana Biyan who were patient and encouraged methrough their prayers from beginning of my studies.
viABSTRACTThe study was designed to identify the role of Stock Exchange market to economicgrowth in Tanzania. It also a determined the factors which hinder the swift growth ofDar es Salaam Stock Exchange Market and the suggested measures to be taken byDSE to promote economic development in Tanzania. The study used the case studybased on triangulation and descriptive design to obtain necessary and requiredqualitative and quantitative data. The intended population of this study was groupsof stackholders of DSE from four categories namely representative of regulatorybodies, representative of corporate organization, stock brokers and analyst andshareholders and investors. The target sample size was 100 stakeholders from fourcategories of DSE.The data for the study were obtained through both primary andsecondary data collection method in the former interview, observation andquestionnaire were used while various published and non-published materials wereused in the later. Data collection was analyzed with assistant of the statisticalpackaged for social science (SPSS): The findings have revealed that both marketcapitalization and value of share traded contribute a small amount in growth of theeconomy of Tanzania. Furthermore, the findings have revealed the challenges whichhinder the growth of DSE, as lack of liquidity, low market capitalization, poormacro-economic high transaction costs, lack of adequate track – openness, lack ofskillfully human resources, and lack of public awareness of DSE. Based on the majorfindings, recommendation to improve the role of DSE, in order to promote economicgrowth in Tanzania, were to improve automated system, promote institutionalinvestors, strengthen education, public awareness and access information of DSE andsuggesting the government to stabilize macro-economic.
viiACKNOWLEDGEMENTSFirst and foremost, I would like to thank the Almighty God for enabling me toaccomplish my studies, may his name be praised forever, Amen.As the fact that this work is the product of many hands and minds, I feel indebted toall those sources from which I have drawn information and person from whom Ihave received help and advice in completing this research paper. Though I cannotmention each of them, individually, but May deepest gratitude goes to the following.Firstly, I would like to thank my supervisor, Dr. W.A Pallangyo, for his time andcomments that were mostly valuable in completion of this study. Despite his busyschedule, he found time to go through and carried my work.Secondly, I want to acknowledge with appreciation the Dar es Salaam StockExchange Market, stakeholders who accepted to be interviewed and returned dullyfilled questionnaire.Thirdly, my special gratitude goes to members of my family, and relative, includingthe late my mummy Damari Biyan, my young brother Magesa Biyan, my youngsister Eliza Biyan, my elder brothers Baraka Biyan, Kasika Biyan, Maregesi Biyanand My elder sisters Bertha Irungu and Nyarugera Biyan for supporting and allowingme to sacrifice my time of caring them during my studies and on writing thisresearch report.
viiiLastly, but not least, I am grateful to my fellow students, friends for their timely andunconditional assistance. However, solely remain responsible for any errors andshortcoming in this study.
ixTABLE OF CONTENTSCERTIFICATION . iiCOPYRIGHT . iiiDECLARATION . ivDEDICATION . vABSTRACT . viACKNOWLEDGEMENTS . viiLIST OF TABLES . xiiiLIST OF FIGURES. . xivLIST OF ABBREVIATIONS . xvCHAPTER ONE . 11.0INTRODUCTION . 11.1Background of the Study . 11.2Statement of the Problem. 61.3Research Objectives. 71.3.1 General Objectives . 71.3.2 Specific Research Objective . 71.4Research Questions . 71.5Significance of the Research . 81.6Scope of the Study . 81.7Organization of the Study . 91.8Limitation of the Study . 9CHAPTER TWO . 112.0LITERATURE REVIEW . 112.1Introduction. 11
x2.2Conceptual Definition. . 112.2.1 Financial System . 112.2.2 Financial Market . 122.2.3 Capital Market . 122.2.4 Primary Market . 122.2.5 Secondary Market . 132.2.6 Stock Exchange Market . 132.2.7 Economic Growth . 142.3Theoretical Analysis . 152.3.1 Role of Stock Exchange Market . 152.3.2 The Policies of Economic Growth . 172.3.3 Measures of Stock Exchange Market . 182.3.4. Determinants of Stock Market Development in Africa. . 232.3.5 Challenges Facing the Dar es Salaam Exchange Stock Exchange Market . 262.5Theories of Stock Exchange Market. 312.5.1 Efficient Market Hypothesis – Theory . 312.5.2 Random Walk Theory. 332.5.3 Chaos Theory . 332.5.4 Risk Theory . 342.6Research Gap . 342.7Conceptual Frame work . 352.7. 1The underlying Theory or Assumption . 352.7.2 The Element or Variables for the Study. . 36CHAPTER THREE . 393.0RESEARCH METHOLODOLOGY . 393.1Introduction. 39
xi3.2Research Design . 393.3Research Strategies . 413.3.1 Survey Population . 413.4Sample and Sampling procedure. . 423.6Methods of Data Collection . 433.7Data Analysis . 443.8Data Cleaning, Reliability and Validity. 463.9Conclusion . 47CHAPTER FOUR . 494.0RESEARCH FINDINGS AND OBSERVATIONS . 494.1Introduction. 494.2Respondent’s Rate of Response. 494.3Respondents Characteristics . 504.3.1 Gender Respondents . 504.3.2. Age of Respondents . 504.3.3 Education and Qualification of Respondent . 514.3.4 Level of Computerization. . 514.5Statistical Results, Analysis and Findings . 524.5.1 Identification of the Contribution of Market Capitalizations of the DSE to theEconomic Growth of Tanzania . 524.5.3 Identification of Other Indicators of DSE which Contributes to EconomicGrowth of Tanzania . 564.5.5 Discussion of Findings . 68CHAPTER FIVE . 715.0 SUMMARY, CONCLUSION AND RECOMMENDATION . 715.1 Introduction . 71
xii5.2Summary of Key Findings . 715.3Conclusion . 725.4Recommendation . 745.4.1 General Recommendation . 745.5Contribution to Knowledge . 765.5.1 Tanzania Public in General . 775.5.2 Capital Market Regulators and Operators . 775.5.3 Investor . 785.5.4 Implication to Government & Policy Maker . 785.6Area for Further Research. . 78REFERENCES . 79APPENDIX . 83
xiiiLIST OF TABLESTable 3.1:The sample of the population. 43Table 4.1:Status of the Questionnaires Distributed and collected . 49Table 4.2:Gender results. . 50Table 4.3:Respondents Age. . 50Table 4.4:Educations and Qualifications of Respondents. . 51Table 4.5:Level of Computerization. . 52Table 4.6:Market Capitalization of DSE to economic growth of Tanzania. 55Table 4.7:Value of share traded . . 57Table 4.8:Number of listed companies . 59Table 4.9:All share Index at the DSE . 61Table 4:10: Turn-Over Ratio . 59Table 4:11: Value Traded Ratio . 60Table 4:12: Market Capitalization as a percentage of GDP . 61Table 4.13 Gross Domestic Product. 62Table 4.14: Regression Statistic . 63Table 4.15: Regression Constant and Intercept . 63Table 4.16: Factors hindering growth of DSE. . 65
xivLIST OF FIGURESFigure: 2.1: Conceptual Frame Work. 32
xvLIST OF ABBREVIATIONSABGBarrick GroupCDSElectronic Central Depository SystemCMCACapital Market Security AuthorityDATESAutomated Trading Electronic SystemDCBDar es Salaam Community Bank.DSEDar es Salaam Stock ExchangeEABLEast African Breweries LtdJHLJubilee Holding LtdKAKenya Airways LtdKCBKenya Commercial Bank.LDMsLicensed Dealing MembersMCMarket Capitalization.NMBNational Microfinance BankNMGNational Media GroupPALPrecision Air Ltd.TATEPATanzania Tea Packers LtdTBLTanzania Breweries LtdTCCTanzania Cigarette Company Ltd.TOLTanzania Oxygen LtdVATValue of Transaction or Share Traded
1CHAPTER ONE1.0 INTRODUCTION1.1 Background of the StudyAll over the world the capital market has played significant roles in nationaleconomic growth and development. One intermediary in the market that operates as arallying point for the overall activities is the stock exchange market. It is a commonpostulation that without a functional stock exchange market, the capital market maybe very illiquid and unable to attract investment. This is so because the stockexchange market is the one which provides liquidity promote efficiency in capitalformation and allocation (Block and Hirts, 2002).The stock exchange market mainly provides liquidity by enabling firm to raise fundsthrough the sell of securitieswith relative ease and speed. As a result the stockexchange market is able to influence investment and economic growth. The largestock exchange market lower the cost of mobilizing savings, facilitating investmentin the most productive technologies (Mohtadi and Agarwal, 2004).Thus for sustainable growth and Development, funds must be effectively mobilizedand allocated to enable business and the economy harnessed their human, materialand managerial resources for efficiency productive. The stock exchange marketenables, government to raise long –term fund (capital), which will enable it toexpand, modernize projects, and finance new investment. If funds are not providedto those, economic areas, such as industry and commercial activities which are
2capable in increasing production and productivity, the rate of expansion of theeconomy decline. A unique benefit of the stock exchange market to entities is theprovision of equity securities. Through the provision of equity securities, companiesacquire perpetual capital for development.Another way in which stock exchange market contributes toward economic growth istoward global risk diversification. As argued by Obstfeld (1994), Devereux andsmith (1994) Smith and Paul (1992) ‘’Stock market provide a vehicle fordiversifying risk. These way shows that greater risk diversification can influencegrowth by shifting investment into high return projects. Savers are usually risk averseand reform from investing in risking investment project yielding lucrative return.In effort of Tanzania government’s Policy to transform it economy from publicgovernment dominant economy to private sector driven economy, it establishes Dares Salaam Stock Exchange Market. The establishment of the Dar es Salaam StockExchange (DSE) marked an important milestone in the effort toward thedevelopment of a functioning capital market for the mobilization and allocation oflong – term capital to the private sector.The Dar es Salaam Stock Exchange was established by the capital market andsecurity authority under Capital Market and Securities (CMS) Act of 1994. The DSEwas incorporated in September, 1996 as a company limited by guarantee without ashare capital under the companies’ ordinance (Cap 212) (DSE, 2008a). The CapitalMarkets and Securities Authority (CMSA) is a government agency established to
3promote and regulate securities business in Tanzania. It was established underCapital Markets and Securities Act, 1994. The legal framework for the regulation ofthe securities industry is the Capital Markets and securities Act, 1994 (Act No: 5 of1994 as amended by Act No. 4 of 1997).The act is supplemented by various regulations that are promulgated by the Ministerof Finance. DSE is a non –profit making organization created to facilitate thegovernment implementations of the economic reforms in particular on enabling theprivate sector raise capital. The exchange becomes operational in April 1998 withTOL Gas Limited listing as the first company followed by the Tanzania BreweriesLimited (TBL) during the same year.The delay was due to the necessary background operational preparations that wereinevitable such as training rules (CMSA, 2008). Hence, a stock exchange is asecondary capital market where large and small investors can buy and sell securities(shares and bonds etc.) it is an organized market where buyers and sellers ofsecurities meet as they are represented by dealers/brokers and acquire or disposesecurities (DSE 2007; Norman, 2006).The DSE has its structure which consist of:- three licensed dealing members, twoassociate members representing listed companies, one associate member representinginstitutional investors, two associate members representing profession, one associatemembers representing the public and chief executive officer who is an ex –officiomembers DSE (2007).
4All trading system at the DSE Trading floor is conducted under an AutomatedTrading Electronic System (DATES), which matches bids and offers using anelectronic matching engine. Brokers post their orders in the system, and matchingorders are displayed on computer terminals in the trading floor.Clearing andsettlement is conducted through an electronic central depository system (CDS). Thisis the share registration system which facilitates registration of changesofownership of securities electronically. The CDS facilitates the delivery of securitiesin time for the settlement of trades to be implemented within five working days(DSE, 2007).Pursuant to the provision of the capital market and securities Act, 1994 the DSE hasestablished a fidelity fund Account to be used to compensate investors who suffersfinancial loss arising from fraud and misappropriation of funds by Licensed DealingMembers (LDMs). The fund is maintained by the DSE. The fund can also be used tocompensate investor who suffers loss as a result of Licensed Dealing members(LDMs) negligence. As of December 1999, four companies have been listed on theDSE. Three of these companies have raised a combined equity capital of Tshs 28.5billion (an equivalent of US 35.71 Million) in the primary capital market. The fourthcompany, East African Development Bank has raised an amount of Tsh. 10 billion(an equivalent of US 12.5 Million) through the issue of a four –year corporate bond (Ziorkhui et al, 2001).Currently, the Dar es Salaam Stock Exchange (DSE) is the only formal trading placefor securities in Tanzania. Seventeen (17) companies are listed. Tanzania Oxygen
5Limited (TOL), Tanzania Breweries Limited (TBL), Tanzania Cigarette Company(TCC), Tanzania Tea Packers Limited (TATEPA), Swiss port Tanzania Limited(Swiss port), Tanzania PortlandCement Company Limited (TWIGA)BarrickGroup Ltd (BG), Dar es salaam Community Bank (DCB), National MicrofinanceBank (NMB), Tanga Cement Company (SIMBA), East African Breweries (EABL)and Kenya Airways (KA), Jubilee Holdings Limited (JHL), Kenya CommercialBank Limited (KCB), CRDB Bank Public Limited Company (CRDB), NationalMedia Group (NMG), Precision Air Limited (PAL). Treasury and corporate bondsare also listed at the Dar es Salaam Stock Exchange (DSE) among other (DSE,2012).Operationalization of the DSE has contributed substantially towards publicenlightenment which has caused a few Tanzanian to invest in listed companies as aresult of this transformation. It is the DSE’s goal that Tanzanian appreciated andeventually adopts a thrift culture that thrives an equity ownership in successfulbusiness concern (DSE 2008).According to Ekundayo (2002) argues that a nation requires a lot of local and foreigninvestment to attain sustainable economic growth development. Thusestablishmenttheof the DSE, marked the beginning of the people in Tanzaniaindulging in purchase of share as a strategy for investing consequently a need forproper decision making on where to invest and why. It can be added that theestablishment of capital market followed suit of many other change which gave asignal for the need to transform the economy from government driven economy to
6private sector. It is this situation that promoted the study to look on the extent towhich the DSEplayed its role on growth of the economy of Tanzania throughprivatization of public owned companies and the avenue of long –term fund tovarious government corporations in Tanzania, between 1998 to 2012. Agoodexample of privatization, in which the researcher is so interested are like that ofNMB Bank in which the government sold 105,000,000 shares at Tsh 600 throughwhich are holdingwas reduced 51% to 30%(NMB prospectus 2008)TanzaniaPortland Cement Company Limited, in which the Government of Tanzania sold allare 30% holding in the company amounting to 53,973, 900 shares at Tsh 435 each(TPCC Prospectus 2006), Swiss port (FormallyDAHACO) in which theGovernment of Tanzania sold all her 40% holding in the company, amounting to17, 640,00 share of 225 each (DAHACO Prospectus 2003).1.2 Statement of the Problem.Stock Exchange Market have played a great role in the investment process indeveloped countries. The literature confirms that Stock Exchange Markets havecontributed to the development and economic growth to a large extent. Since theincorporated of the Dar es Salaam stock exchange in the mid 1990’s, the governmentof Tanzania has been put forward strategies and initiatives to promote itsperformance. Despite of all the developments, several studies have revealed that theperformance of Dar es Salaam stock exchange still is not promising (Shivji, 2010).This study intends to fill the existing gap by identifying at what extend the Dar esSalaam stock exchange contributes to economic growth and provide recommendationwhat should be done in order to improve its performance.
71.3 Research Objectives1.3.1 General ObjectivesThe main objectives of this study will be to explore the role of stock exchangemarket to the economic growth in Tanzania.1.3.2 Specific Research ObjectiveSpecifically the study aimed at:a) To identify at which extent market capitalization at the Dar es Salaam StockExchange contributes to the growth of the economy in Tanzaniab) To determine at which extent value of share traded at the Dar es Salaam StockExchange contributes to the growth of the economy in Tanzaniac) To examine the challenges facing the growth of the DSE market.1.4 Research Questions1.4.1 Main Research QuestionThe main question that attempted to be answered by this study was, “What role doesDSE play to economic growth of Tanzania from 2003 – 2012”?1.4.2Specific Research Question.a) What are the contributions of market capitalization at the Dar es Salaam StockExchange to the growth of the economy in Tanzania?b) What are the contributions of value of share traded at the Dar es Salaam StockExchange to the growth of the economy Tanzania?c) What are the challenges facing the growth of the DSE market?
81.5Significance of the ResearchThe emerging of capital markets has received a considerable attention from variousresearch and study particularly in the country. This study will trace the role of thestock exchange company is the mobilization of the resources and directing suchresources to the productive sectors of the economy (CMSA, 2008 and DSE, 2008).Furthermore, the findings obtained are expected to explore how DSE offers arelatively convenient and an alternative access to capital in comparison to thetraditional financial instruments such as bank loans. The resources directing strategyhas up to 2001 enabled about 40,000 Tanzaniansto be ownersof variouscompanies through purchase of shares (DSE, 2008).Moreover, the finding obtained are expected to help academicians and researchers indoing further research and the same subjects with the aim of improving the role ofstock exchange market not only in Tanzania but also in other African Countries. Thestudy also serves as a guide for future reference for both practitioners andacademicians who are doing research on similar topic.1.6 Scope of the StudyThis study will cover the role of Stock Exchange Market to economic growth ofTanzania taking DSE as a case study. It will review how DSE as a Stock ExchangeMarket facilitate the selling and buying security. However this study will try toidentify the role of DSE in economics growth of Tanzania, as well as limitingfactors facing its growth and measures to be taken by DSE to curb or mitigate the
9challenges facing the exchange. For this study Primary data and Secondary datacollection will be used. Primary data collection will be conducted using anonymousquestionnaire to selected respondent at the DSE. The secondary data will be obtainedfrom various published and unpublished sources such as news paper, books, web site,etc.1.7 Organization o
The stock exchange market mainly provides liquidity by enabling firm to raise funds through the sell of securities with relative ease and speed. As a result the stock exchange market is able to influence investment and economic growth. The large stock exchange market lower the cost of mobilizing savings, facilitating investment
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